A not-so-dismal science: A aroader view of economies and societies. (Book Reviews).

A Not-So-Dismal Science: A Broader View of Economies and Societies. Edited by M. OLSON and S. KAKHONEN. Oxford: Oxford University Press 2000. Pp.x + 274, biblio, index. [pounds sterling]14.99 (paper) ISBN 0-19-829490-5.

This collection of ten contributions aims to indicate that, far from being the dismal science Thomas Carlyle once called it, economics can fruitfully enhance our understanding of topics as diverse as law and order, war and the Industrial Revolution, and autarkic social groups. The economic approach in question, however, takes issue with the standard neoclassical one which proclaims that economies generally operate efficiently. As the editors note, broadening one's focus to include real-world phenomena such as tax-taking by rulers, missing markets and bad policy design, debunks the presumption that there are no 'big bills' (major efficiency gains) left to pick up on the world's sidewalks.

However diverse the topics covered, the one thing they have in common is a running dialogue with the late Mancur Olson's work. Olson's own two chapters start from the question that also underpinned his last book, Power and Prosperity. Why are only a few countries in the world rich, despite the pervasiveness of markets even in poor countries? Olson argues that the large differences in per capita income across countries cannot be sufficiently explained by the differences in productive resources (capital, land and labour) that standard economic models typically resort to. He rounds up a broad list of embarrassing observations to this effect. His conclusion, almost by elimination, follows: poor countries are poor, not primarily because they are disadvantaged in terms of productive factors, but because their governments produce bad economic policies and institutions.

The key to prosperity, for Olson, lies in whether rulers have an encompassing, rather than a narrow, stake in the economy. Stationary autocrats with large tax stakes have stronger incentives to promote the total social product than do bands of roving bandits. Reducing the tax rate and investing in public goods enhances their base for tax-taking. Democratic majorities, unlike autocrats, also earn a substantial share of society's market income, in addition to controlling tax collection. This gives them an even stronger interest in society's productivity. Hence democracies, unless they are captured by powerful small interests, are even more conducive to prosperity than autocracies.

Yet there is a sobering remark. Whoever overthrows a dictator typically has incentives to establish a large stake himself. Thus, despite being wealth-enhancing, transitions from autocracy to democracy depend essentially on accidents of history that leave a balance of power between revolutionaries. J. Bradford De Long establishes more such fortuitous accidents. Because princes care for ...